mr2100 (c) 200 9 paul tilley pricing: building a price foundation chapter 13 marketing 2 mr2100

MR2100 (c) 200 9 Paul TilleyMR2100 (c) 200 9 Paul Tilley

Pricing: Building a Pricing: Building a Price FoundationPrice Foundation

Chapter 13Chapter 13

Marketing 2Marketing 2

MR2100MR2100

MR2100 (c) 2004 Paul TilleyMR2100 (c) 2004 Paul Tilley

How much should it cost?How much should it cost?

How does Marine Atlantic arrive at How does Marine Atlantic arrive at the cost of a ticket to take the Ferry the cost of a ticket to take the Ferry from NL to NS?from NL to NS?

Factors:

Wages

Infrastructure - Ships etc.

Fuel

Insurance

Subsidy

Inflation


Price is...Price is...

The money or other The money or other consideration exchange for consideration exchange for ownership or use of a good ownership or use of a good or serviceor service


Price & Value Price & Value

Price is a fixed term.Price is a fixed term. Value is a relative term that is Value is a relative term that is

measured by the consumer. measured by the consumer.

Value is the ratio of perceived Value is the ratio of perceived benefits offered to price benefits offered to price charged.charged.


Price is made up of..Price is made up of..

The Sticker (list) priceThe Sticker (list) price– lessless

Discounts offered Discounts offered (Sales, Mark-downs, Volume)(Sales, Mark-downs, Volume)

– lessless Allowances offered Allowances offered (Trade in Allowance, case (Trade in Allowance, case

allowancesallowances

– Plus Plus Taxes Taxes (HST, GST, PST)(HST, GST, PST)


Profit is...Profit is...

Total Revenue (Price x Quantity)Total Revenue (Price x Quantity)– lessless

Total Cost (Fixed Costs + Variable Total Cost (Fixed Costs + Variable Costs)Costs)


The Steps Involved in The Steps Involved in Setting a PriceSetting a Price

Step 1 -- Step 1 -- Identify Pricing Constraints and Identify Pricing Constraints and ObjectivesObjectives

Step 2 -- Step 2 -- Estimate Demand and Estimate Estimate Demand and Estimate RevenueRevenue

Step 3 -- Step 3 -- Determine Cost-Volume and Profit Determine Cost-Volume and Profit relationshipsrelationships

Step 4 -- Step 4 -- Select a Approximate Price LevelSelect a Approximate Price Level Step 5 -- Step 5 -- Select a list priceSelect a list price Step 6 -- Step 6 -- Make special Adjustments to QuotedMake special Adjustments to Quoted

PricePrice


Step 1 - Identify Constraints and Step 1 - Identify Constraints and ObjectivesObjectives

Constraints are practical limits under Constraints are practical limits under which a company must set its price which a company must set its price range for a product.range for a product.

Constraints include:Constraints include:– Demand for the actual product, its class of product or Demand for the actual product, its class of product or

the demand for the Brand name.the demand for the Brand name.– Newness of the product -- where it is in the life cycle.Newness of the product -- where it is in the life cycle.– A single product limits the range of prices that can be A single product limits the range of prices that can be

charged, whereas a line of products can be offered at charged, whereas a line of products can be offered at different prices depending on the model.different prices depending on the model.


Step 1 - Identify Constraints and Step 1 - Identify Constraints and Objectives cont...Objectives cont...

Constraints include:Constraints include:

– The cost of making and marketing the product.The cost of making and marketing the product.– The costs involved in changing the prices once they are The costs involved in changing the prices once they are

set.set.– The type of competitive market that exists. Little The type of competitive market that exists. Little

competition means prices can be set by the seller competition means prices can be set by the seller whereas heavy competition means that the market sets whereas heavy competition means that the market sets the prices and as a result prices will tend to go down.the prices and as a result prices will tend to go down.

– What other similar products sell for limits the range of What other similar products sell for limits the range of price that can be charged.price that can be charged.



The Constrains establish the upper The Constrains establish the upper and lower bound for a price that can and lower bound for a price that can be charged. be charged.

Where & how a product is priced Where & how a product is priced within that lower and upper bound within that lower and upper bound depends on the Objectives of the depends on the Objectives of the organization organization



ObjectivesObjectives The various objectives that an organization has in The various objectives that an organization has in

order to set its prices depend on several factors:order to set its prices depend on several factors:– Are they wanting to maximize profit?Are they wanting to maximize profit?– Are they wanting to maximize Sales revenue?Are they wanting to maximize Sales revenue?– Are they trying to maximize Market share?Are they trying to maximize Market share?– Are they trying to sell a lot of product?Are they trying to sell a lot of product?– Are they trying to maximize consumer value?Are they trying to maximize consumer value?– Are they trying to be socially responsible?Are they trying to be socially responsible?

– Or, finally are they just trying to survive?Or, finally are they just trying to survive?


Step 2; Estimate Demand and Step 2; Estimate Demand and Project Revenue at that demand Project Revenue at that demand The Demand for a product is a The Demand for a product is a

function of two major types of things.function of two major types of things.– 1) The price of the product -- Usually the 1) The price of the product -- Usually the

higher the price the lower the demand.higher the price the lower the demand.– 2) Factors other than price, such as 2) Factors other than price, such as

consumer tastes, consumer income or consumer tastes, consumer income or the availability and price of other similar the availability and price of other similar or substitutable products.or substitutable products.


Step 2; Estimate Demand and Step 2; Estimate Demand and Project Revenue at that demand Project Revenue at that demand A Demand Schedule and a A Demand Schedule and a

Demand Curve reflecting quantity Demand Curve reflecting quantity demanded at different price demanded at different price levels.levels.

Price QuantityDemanded

5 10004 20003 30002 40001 5000

$

Quantity


Step 2; Estimate Demand and Step 2; Estimate Demand and Project Revenue at that demand Project Revenue at that demand A Demand Schedule and a A Demand Schedule and a

Demand Curve reflecting a shift in Demand Curve reflecting a shift in the demand curve brought about the demand curve brought about by a change in quantity by a change in quantity demanded because of non price demanded because of non price changes. Assume that the product changes. Assume that the product becomes “trendy”. Relative qty. becomes “trendy”. Relative qty. demanded at any given price demanded at any given price point goes up.point goes up.

Price Quantity New Qty. $ Demanded Demanded5 1000 20004 2000 30003 3000 40002 4000 50001 5000 6000 Quantity

$

Line shifts right


Step 2; Estimate Demand and Step 2; Estimate Demand and Project Revenue at that demandProject Revenue at that demand Terms to Know:Terms to Know:

– Total revenueTotal revenue– Average revenueAverage revenue– Marginal revenueMarginal revenue– Elasticity of demandElasticity of demand


Step 3 - Determine a cost-profit, Step 3 - Determine a cost-profit, cost -volume relationshipcost -volume relationship

MARGINAL ANALYSISMARGINAL ANALYSIS One way an organization can determine One way an organization can determine

whether it is maximizing its potential profit is whether it is maximizing its potential profit is to calculate its marginal costs and marginal to calculate its marginal costs and marginal revenues from one level of output to the revenues from one level of output to the next.next.

When marginal costs equal marginal revenue When marginal costs equal marginal revenue (MR=MC) stop producing/selling any more (MR=MC) stop producing/selling any more (Why?: It costs as much to make that extra (Why?: It costs as much to make that extra unit as the extra revenue selling that unit will unit as the extra revenue selling that unit will bring in.)bring in.)



BREAK EVEN ANALYSISBREAK EVEN ANALYSIS This determines the level of This determines the level of

production/sales required in order for a production/sales required in order for a company to stop loosing money, break-company to stop loosing money, break-even and start making money.even and start making money.

To calculate the break even point (in units) To calculate the break even point (in units) you need:you need:– TOTAL FIXED COSTSTOTAL FIXED COSTS– UNIT VARIABLE COSTS UNIT VARIABLE COSTS – SELLING PRICE PER UNITSELLING PRICE PER UNIT



BREAK EVEN ANALYSISBREAK EVEN ANALYSIS

Break Even PointBreak Even Point = = Fixed CostsFixed Costs (Selling Price per unit - Unit Variable cost) (Selling Price per unit - Unit Variable cost)



BREAK EVEN CHARTBREAK EVEN CHART

Total Cost line

Fixed Cost Line

Var. Cost Component

Fixed Cost Component0

$

Quantity

(C) 2004 Paul Tilley (C) 2004 Paul Tilley

Step 4 - Selecting an Step 4 - Selecting an Approximate Price LevelApproximate Price Level

There are 4 basic methods used to There are 4 basic methods used to set an approximate price level.set an approximate price level.– Demand Based MethodsDemand Based Methods – Cost Based MethodsCost Based Methods– Profit Based MethodsProfit Based Methods– Competitive Based MethodsCompetitive Based Methods



– Demand Based MethodsDemand Based Methods - The price - The price that is picked is set based on the that is picked is set based on the projected demand for the product. projected demand for the product. Specific strategies include: Specific strategies include: Skimming pricingSkimming pricing (High price -low volume) (High price -low volume)Penetration pricingPenetration pricing (lower price-high (lower price-high

volume) volume) Prestige pricingPrestige pricing (similar to skimming with (similar to skimming with

snob appeal)snob appeal)



– Demand Based MethodsDemand Based Methods (cont.) (cont.)Price liningPrice lining (Offering different models with (Offering different models with

different prices)different prices)Odd-even pricingOdd-even pricing (Setting prices with odd (Setting prices with odd

numbers $499.99 sounds & feels better than numbers $499.99 sounds & feels better than $500.00)$500.00)

Demand BackwardDemand Backward (Predict sales, set Total (Predict sales, set Total revenue target take total revenue/sales in revenue target take total revenue/sales in units = price)units = price)

Bundle PricingBundle Pricing (Offering a bundle of (Offering a bundle of complementary products for a single package complementary products for a single package price - vacation packagesprice - vacation packages

Value-Based PricingValue-Based Pricing (Increase benefits (Increase benefits offered for a same or lower price)offered for a same or lower price)



– Cost Based MethodsCost Based Methods - The price is set - The price is set based on the approximated cost of based on the approximated cost of bringing the product to market.bringing the product to market.Mark up PricingMark up Pricing ( The cost of the product is the ( The cost of the product is the

basis for which the price calculation is based.basis for which the price calculation is based.– Standard Mark up & Cost Plus pricing add a fixed Standard Mark up & Cost Plus pricing add a fixed

percentage or a fixed amount to the cost to arrive at percentage or a fixed amount to the cost to arrive at a price.a price.

Experience Curve Pricing Experience Curve Pricing ( As you get better at ( As you get better at making products the time and cost to make making products the time and cost to make each one is reduced -- therefore the price can each one is reduced -- therefore the price can be reduced. be reduced.



– Profit Based MethodsProfit Based MethodsTarget Profit Pricing (see calculations in text)Target Profit Pricing (see calculations in text)Target Return on SalesTarget Return on SalesTarget Return on Investment PricingTarget Return on Investment Pricing



– Competition Based MethodsCompetition Based MethodsCustomary PricingCustomary Pricing (Charge a price that is (Charge a price that is

the “usual” price in the industry.)the “usual” price in the industry.)AboveAbove -Below Market Price (Charge a price -Below Market Price (Charge a price

that differs from the industry)that differs from the industry)Loss-Leader pricingLoss-Leader pricing (Sell a promoted item at (Sell a promoted item at

a loss or low price -- the intent is to attract a loss or low price -- the intent is to attract customers to buy this product and in the customers to buy this product and in the process they will buy other regular priced process they will buy other regular priced items)items)

Sealed Bid PricingSealed Bid Pricing (Same as a “Tender” - (Same as a “Tender” - Suppliers are invited to bid to supply Suppliers are invited to bid to supply specified product(s) and the lowest bid price specified product(s) and the lowest bid price wins the deal)wins the deal)


Step 5 - Set a List PriceStep 5 - Set a List Price

Based on all of the analysis done thus far Based on all of the analysis done thus far in the process a “List” price can be in the process a “List” price can be determined. The list price is a suggested determined. The list price is a suggested price and may not truly reflect the price price and may not truly reflect the price charged to all customers.charged to all customers.

Customer, Company and Competitive Customer, Company and Competitive factors may come into play in determining factors may come into play in determining whether or not a company deviates from whether or not a company deviates from its list price.its list price.


Step 6 - Adjustments to the List Step 6 - Adjustments to the List PricePrice

Special Adjustments to the List or Special Adjustments to the List or Quoted Price:Quoted Price:– DiscountsDiscounts– AllowancesAllowances– Geographical AdjustmentsGeographical Adjustments



Discounts - reductions in the list Discounts - reductions in the list price based on some of the following price based on some of the following reasons:reasons:– QuantityQuantity– SeasonalitySeasonality– TradeTrade– Paying CashPaying Cash



Allowances - An effective reduction in Allowances - An effective reduction in the unit price based on some of the the unit price based on some of the following reasons:following reasons:– A trade in allowanceA trade in allowance– A promotional allowanceA promotional allowance



Geographical Adjustments - an effective Geographical Adjustments - an effective reduction or increase in the unit list price reduction or increase in the unit list price because of your geographical location because of your geographical location relative to the supplier.relative to the supplier.– Free-on-Board (FOB) pricingFree-on-Board (FOB) pricing - They will put it - They will put it

on the truck but you pay for the shipping on the truck but you pay for the shipping costs.costs.

– Uniform Delivery pricingUniform Delivery pricing - Price is the same - Price is the same wherever you live -- the supplier pays the wherever you live -- the supplier pays the shipping.shipping.


Legal Aspects of Setting PricesLegal Aspects of Setting Prices

Price fixingPrice fixing - several suppliers colluding - several suppliers colluding to raise prices - illegalto raise prices - illegal

Price DiscriminationPrice Discrimination - Charging one - Charging one price to one customer and another price to price to one customer and another price to another for no reason - illegalanother for no reason - illegal

Deceptive PricingDeceptive Pricing - Falsifying the true - Falsifying the true price of the item - deceiving the customer price of the item - deceiving the customer - illegal- illegal

See Figure 14.8See Figure 14.8

mr2100 (c) 200 9 paul tilley pricing: building a price foundation chapter 13 marketing 2 mr2100

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